Technical papers/Derivatives
Closing out DVA
The choice of a close-out convention applicable on the default of a derivatives counterparty can have a significant effect on the credit and debit valuation adjustments, as can the order of defaults. Jon...
The one-curve world of pre-crisis modelling is long gone – now derivatives desks need to use a variety of fixings depending on the product traded. Here, Fabio Mercurio and Zhenqiu Xie show how a stochastic...
Local stochastic volatility models combine perfect calibration at time zero with realistic price dynamics. But traditional methods tend to underestimate the forward skew, and mis-price exotics such as...
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More Technical papers/Derivatives articles
Quadratic Gaussian inflation
Quadratic Gaussian models are particularly amenable to analytic solutions, and so have become popular for rates modelling. Here, Manlio Trovato, Diana Ribeiro and Hringur Gretarsson extend the approach to inflation, and show that realistic smile and convexity...
An easy-to-hedge covariance swap
Covariance swaps that track the covariance of assets can be difficult to hedge because there is no known static replication formula, unlike the case for variance swaps. However, in the case of swaps measuring the covariance between the absolute returns...
Quadratic Gaussian inflation
Quadratic Gaussian models are particularly amenable to analytic solutions, and so have become popular for rates modelling. Here, Manlio Trovato, Diana Ribeiro and Hringur Gretarsson extend the approach to inflation, and show that realistic smile and convexity...
Adjoint Greeks made easy
Luca Capriotti and Michael Giles show how algorithmic differentiation can be used to systematically implement the adjoint calculation of sensitivities in Monte Carlo for general path-dependent and multi-asset options, with minimal analytical effort. With...
Copulas and credit models
Latent variable models of default are used extensively both in internal credit rating methodologies and in the pricing of exotic credit derivatives. But, as Rüdiger Frey, Alexander McNeil and Mark Nyfeler demonstrate using the copula formalism, such...
Cooking with collateral
In the wake of the crisis, the traditional assumption of a risk-free counterparty and rate has been shown to be false, yet it still underpins finance theory. Vladimir Piterbarg develops theoretical foundations for a model of an economy without a risk-free...
Cutting Edge introduction: The origins of the standardised CVA charge
Regulators are attempting to narrow the gap between regulatory capital formulas and banks’ internal models – but recent work in the area of the controversial credit value adjustment demonstrates just how far apart they remain. Laurie Carver introduces...
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